Forecasting U.S. Trade in Services

This paper provides a set of forecasts of United States international trade in services, both at the aggregate level and for four subcategories. These sectors are: travel, which is mostly tourist expenditures; passenger fares, which is mostly passenger air transportation; transportation, other than passenger transportation; and other private services, including education, financial services, insurance, telecommunications, and business, professional and technical services. A forecasting model is constructed and estimated, based on conventional economic forces of supply and demand, dependent on cost variables and income variables as well as relative prices. For forecasting purposes, these variables are taken from the Michigan Quarterly Econometric Model of the U.S. Economy, a macroeconomic forecasting model with forecasts provided regularly by the University of Michigan Research Seminar in Quantitative Economics. The equations of the services trade model are reported and discussed, and the performance of the estimated equations is evaluated. The quarterly forecast paths are provided for both aggregate and sectoral services trade, including exports and imports, through the end of 2001. Results indicate that imports will continue to rise over the forecast period, while exports, after remaining nearly stationary for several quarters in some sectors in 1999, will resume their rise thereafter. This forecasting work is to be continued, and it is suggested, in addition, that future research would be useful to explore the determinants of the production and sales of foreign services affiliates of U.S. parent companies.